Introducing a zero standing charge energy price cap variant

What this is about

Ofgem consulted on creating a new variant of the energy price cap that sets the standing charge at zero, recovering all supplier costs through the unit rate instead. Under the current cap structure, every domestic customer pays a fixed daily standing charge — currently around 61p/day for electricity and 31p/day for gas — regardless of how much energy they use. A zero standing charge variant would eliminate that fixed cost and load it onto the per-kWh price instead.

The consultation follows Ofgem's August 2024 call for input on standing charge reform, which drew an unusually strong consumer response. The message was clear: many households want the option to pay only for what they use. Standing charges are regressive in practice — a pensioner heating one room pays the same daily fixed cost as a four-bedroom household running multiple appliances. For prepayment meter customers, standing charges accumulate even when no energy is drawn, eating into credit balances and contributing to self-disconnection. Ofgem is responding to political and consumer pressure, but the underlying question is an economic one: how should fixed network and policy costs be recovered from domestic consumers, and who should bear the distributional consequences of that choice?

What the standing charge actually covers

The standing charge is not a supplier margin line. Roughly 85% of it consists of pass-through costs that suppliers cannot avoid: network charges (TNUoS, DUoS, transmission and distribution use of system), metering costs, policy levies (ECO, WHD), and green gas levy contributions. The supplier's own fixed costs — billing, customer service, regulatory compliance — account for a small fraction. This matters because eliminating the standing charge does not eliminate the costs. It moves them into the unit rate, where they are recovered volumetrically.

The distributional effect is straightforward. Low-usage households — typically single occupants, the elderly, those in small properties — currently pay a standing charge that represents a large share of their total bill. They benefit from a zero standing charge tariff because their low consumption means they pay less of the redistributed fixed costs. High-usage households — larger families, electric heating users, EV owners, heat pump adopters — pay more, because the unit rate must rise to recover the same total revenue.

This creates a tension with electrification policy. The government wants households to switch from gas boilers to heat pumps, which roughly triples electricity consumption. A zero standing charge tariff makes that switch more expensive at the margin, because every additional kWh carries a higher burden of fixed cost recovery. The same applies to EV charging. Ofgem is solving a fairness problem for today's consumption patterns while potentially worsening the economics of the consumption patterns the government is trying to encourage.

The outcome

The consultation closed on 21 March 2025 and received 51 organisational responses (15 suppliers, 28 charities and consumer groups, 8 industry bodies), plus over 10,000 responses from organised consumer campaigns and 250 individual consumers.

Ofgem has landed on a compromise position rather than a pure zero standing charge mandate. The decision, published 24 July 2025, requires energy suppliers to offer at least one lower standing charge tariff — not necessarily zero. This must be available at all times and in all regions. Subject to a further consultation on implementation details, the requirement would take effect by January 2026.

Three things to note about this outcome:

It is a mandate, not an option. Suppliers must offer the tariff. They cannot choose to sit it out. This is a licence condition change, not guidance. The competitive dynamics matter: if only some suppliers offered zero or low standing charge tariffs, they would attract low-usage customers (who are cheaper to serve per unit) while competitors retained the high-usage base. By mandating universal availability, Ofgem avoids adverse selection — but also removes the competitive discovery process that might have revealed what standing charge level consumers actually prefer.

"Lower" is not "zero." The original consultation proposed a zero standing charge variant. The outcome softened this to "at least one lower standing charge offer." This gives suppliers flexibility to design tariffs with reduced but non-zero standing charges, which limits the unit rate inflation and reduces the cross-subsidy from high to low users. It also means the headline consumer demand — "I want to pay nothing when I use nothing" — is not guaranteed to be met. Consumer groups who campaigned for zero may find the actual offers underwhelming.

The cap methodology question is unresolved. The price cap currently sets maximum standing charges and unit rates separately. A zero or lower standing charge variant requires a companion unit rate cap that is higher than the standard cap's unit rate, calibrated so that total recoverable revenue remains the same. How Ofgem calculates this — whether it uses average consumption, median consumption, or a different reference point — determines the actual bill impact for every customer segment. The methodology consultation is still to come.

Who wins, who loses

What to watch

The methodology consultation. The January 2026 deadline requires Ofgem to consult on and finalise the cap variant methodology in the second half of 2025. The devil is in the reference consumption assumption. If Ofgem uses Typical Domestic Consumption Values (currently 2,700 kWh electricity, 11,500 kWh gas), the unit rate uplift is moderate. If actual opt-in customers have much lower consumption than the reference, suppliers face a revenue shortfall on the variant tariff.

Opt-in rates. The tariff is opt-in. If only low-usage customers switch (which is rational), the variant tariff pool has below-average consumption, and the unit rate within that pool must be higher than modelled. This is textbook adverse selection. Ofgem will need to decide whether to set the variant cap based on average system consumption or based on expected opt-in consumption — two very different numbers.

Interaction with electrification. DESNZ is separately consulting on rebalancing policy costs from electricity to gas (or to general taxation) to close the electricity-gas price gap and incentivise heat pump adoption. A zero standing charge variant that raises electricity unit rates works against that objective. The two consultations need to be read together, but they are being run by different bodies on different timelines.

Smart tariff interaction. Time-of-use tariffs, which charge different unit rates at different times of day, already have complex standing charge structures. A zero standing charge constraint on top of time-of-use pricing further compresses the design space available to suppliers. The risk is that the mandate crowds out tariff innovation by fixing one variable (standing charge = zero or low) while the market is trying to flex another (time-varying unit rates).

How to respond

This consultation closed on 21 March 2025. Responses were submitted via Ofgem's online consultation platform. The decision document and summary of responses were published on 24 July 2025. A further consultation on implementation details is expected before the January 2026 target date.